Getting unstuck: Why some people get out of poverty and others don't

Seventy percent of Americans born at the bottom fifth of income never rise up to the middle. But what about those few who do? What makes them different?

Michael De Groote

Call it rags to rags.
While many Americans believe the poor can rise up from the bottom, statistics show the majority do not. New research by Pew's Economic Mobility Project finds 70 percent of those who are born in the bottom fifth never climb to even the middle of the economic ladder.
"One of the hallmarks of the American Dream is the belief that anyone who works hard and plays by the rules can achieve economic success," says Diana Elliott, who manages Pew's research on economic mobility.
While that dream may seem no longer in reach for the poorest Americans, some do move up, Elliott says.
Seventeen percent who were born in the bottom fifth of income make it up to the middle as adults. Nine percent make it up to the fourth highest fifth and a measly 4 percent climb to the top fifth of income in the United States. What did they have or what did they do differently that enabled them to rise above not only their parents but their peers?
Elliott says this new analysis by Pew shows for the first time what those differences might be - and the surprising role of savings in making the jump upward in income.
Education
It probably isn't a surprise that one of the reasons some people make higher incomes is their education level. Elliott says past research by Pew has also shown education is important. She says this new analysis, however, shows how powerful of a difference it makes.
If someone at the bottom graduated from college, there was an 86 percent chance they would jump up at least one fifth on the income ladder. They also had a 53 percent chance of jumping up two levels to the middle fifth of income. This is almost a complete flipping of the chances people have without a college degree.
Dual-earners
Another factor that propelled people up in income was dual-earning, although it was not quite as clear an indicator as having a college degree. If a household had two earners, then there was an 84 percent chance they would jump up a level on the income ladder. Fifty percent would climb at least as high as the middle.
Timothy Smeeding, director of the Institute for Research on Poverty based in Madison, Wis., says that dual-earning implies some amount of intact families - something that is becoming less common.
Unemployment
A third huge factor in helping people break from the bottom was their history of unemployment. People who did not have a period of unemployment were 64 percent likely to move up one level of income and 34 percent likely to reach the middle.
Smeeding laments the trend of employers not even looking at hiring unemployed people.
Race
While many of the factors related to increasing income are at least potentially under the control of people born in the lowest income level, at least one important item is not: race.
"If you look at the findings, there are some that are not potentially encouraging," says Elliott. "This study reinforces how difficult movement is upward out of the bottom (fifth) for blacks rather than whites."
The study is based on the Panel Study of Income Dynamics - a look at actual parent/children pairings starting in 1968 and continuing to today. This means that because so few samples were taken in the 1960s from Latino families, there isn't enough data available to see how those families have fared over time. So the study is best able to look at black and white families. Elliott says Pew has found a persistent gap between white and black families.
Whites were two times more likely to leave the bottom fifth of income than blacks. Forty-five percent of blacks got out of the bottom versus 68 percent of whites.
That 23-point difference shrinks when comparing the percentage of whites and blacks that climbed to the middle fifth. Twenty-five percent of blacks at the bottom made the middle while 35 percent of whites did - a 10 percent difference.
"This underscores the persistent race gap in economic mobility," Elliott says.
Savings and wealth
One of the more surprising ways people can jump the income ladder has to do with savings.
Of course people can have an increase in income without having greater savings or wealth. Just because somebody makes more doesn't mean they won't spend everything. But when looking at who gets out of poverty, savings make a big difference.
"We've seen hints in Pew's research that those who were financially mobile were also more financially secure," says Elliott, "but this research really shows the magnitude of the difference between savings and wealth for those who move up versus those who don't."
Elliott says Pew's research shows that while a vast majority of Americans end up making more than their parents, only half have more wealth.
But those who rose from the bottom fifth of income had six times higher median savings than those who didn't move up - meaning liquid savings such as checking and savings accounts, real estate, stocks, vehicles and so forth.
Their median wealth was eight times higher and their median home equity was 21 times higher.
The Pew report is careful to point out that this does not imply that having more savings or wealth result in upward income mobility as much as it shows that the two go "hand in hand." The savings, instead, may make it easier for families to make the investments in things such as higher education. Elliott calls it a "cushion of savings and wealth to fall back on during hard times and to invest in their future economic security and mobility."
If people had 10 times more savings than the people at the bottom, they were five times more likely to leave the bottom.
"It underscores that financial security and economic mobility really go hand in hand," says Elliott. "The more financially secure families can become - even at the bottom - they can use that to leverage future economic mobility."
Timothy Flacke, executive director of Doorways to Dreams, an organization based in Allston, Mass., that encourages savings among lower-income people, says savings is a key ingredient to build economic prosperity and mobility. "(Savings) can help a household successfully navigate financial emergencies, place a deposit on an apartment in a safer community, or help finance the cost of higher education," he says.
Common sense
Smeeding says the Pew analysis is a "common sense report."
"It makes sense," Smeeding says. "If you have more assets, you are more likely to get out of the bottom. If you happen to have two full-time workers, you are more likely to get out. If you happen to graduate from college, you are more likely to get out. So those are all things that help people, who otherwise would be stuck, to move up. But we know there are a lot of people who get stuck there."
Smeeding says the study's data have a few limitations (in part, that lack of data about Latinos).
At the beginning of the month, Smeeding spoke in Ohio with a professor who told him about how many non-traditional students are graduating from college. "But when you get a BA in Akron," she told him, "there are no jobs."
But sooner or later, Smeeding says, that BA will pay off. "But whether it will pay off in Akron," he says, "I don't know."
One of the keys to mobility, Smeeding says, is being mobile - being in a city where there are more jobs.
Savings is budgeting
When Paul Golden, a spokesman for the National Endowment for Financial Education based in Denver, hears that having savings is linked to climbing the ladder of income, he sees something behind the savings: budgeting.
"People who are saving more and increasing their liquidity have done more to budget," he says. "They look at how they are spending their money. If you take those steps, you will increase your wealth."
Golden says even at lower levels of income, savings is possible - and can start with just saving change. He also says that many poor are "unbanked" and so rely on check-cashing services that charge them 10 percent. "They could be saving that 10 percent," he says.
And maybe start their way up the income ladder.
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